U.S. Savings Bond

Definition

A U.S. Savings Bond is a debt security issued by the U.S. Department of the Treasury to help fund federal spending, offering a secure way for individuals to save money and earn interest over a long term. These bonds are one of the safest investment options because they are backed by the full faith and credit of the U.S. government. U.S. Savings Bonds typically come in two series: Series EE and Series I.

Series EE Savings Bonds

Series EE Bonds are purchased at face value and pay a fixed interest rate. They are guaranteed to at least double in value over the first 20 years, and they can earn interest for up to 30 years.

Series I Savings Bonds

Series I Bonds are sold at their face value and earn interest through a combination of a fixed rate and an inflation rate. This makes them beneficial in periods of inflation, as they provide a return above the rate of inflation.

Examples

Purchasing a Series EE Bond: An investor buys a Series EE bond for $200. After 20 years, the bond will be worth at least $400 due to the U.S. Treasury’s guarantee of doubling its value at maturity.
Series I Bond and Inflation Protection: An individual purchases a Series I bond with a fixed rate of 0.5% and adds an inflation adjustment that follows the Consumer Price Index (CPI). If inflation rises to 3%, the bond earns approximately 3.5%.

Frequently Asked Questions

What is the minimum purchase amount for U.S. Savings Bonds?

The minimum purchase amount for electronic U.S. Savings Bonds is $25, while paper bonds are no longer issued since 2012.

How are taxes applied to savings bond interest income?

Interest earned on U.S. Savings Bonds is subject to federal income tax but is exempt from state and local taxes.

How long do I have to hold a U.S. Savings Bond before I can cash it?

You must hold a U.S. Savings Bond for at least one year before you can cash it. However, if you cash it before five years, you’ll forfeit the last three months of interest.

Can I purchase U.S. Savings Bonds through my bank?

As of January 1, 2012, paper savings bonds are no longer sold at financial institutions. Instead, you can purchase electronic savings bonds online through the TreasuryDirect website.

What are the differences between Series EE and Series I Savings Bonds?

Series EE bonds are guaranteed to double in value over 20 years and favor stability, whereas Series I bonds provide protection against inflation with a combination of fixed and variable interest rates.

Treasury Bond: A long-term U.S. government debt security with a fixed interest rate and maturity period of more than 10 years.
Fixed Income Security: A type of investment that provides regular income in the form of interest payments.
Inflation Rate: The rate at which the general level of prices for goods and services is rising, and subsequently, eroding purchasing power.

Online References

TreasuryDirect: Official website for buying U.S. Savings Bonds and other Treasury securities.
Investopedia on U.S. Savings Bonds
U.S. Department of the Treasury

Suggested Books for Further Studies

“The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More” by Annette Thau
“Bond Investing For Dummies” by Russell Wild
“The Intelligent Investor: The Definitive Book on Value Investing” by Benjamin Graham
“Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman and Angel Serrat

Fundamentals of U.S. Savings Bonds: Investment Basics Quiz

### What is a primary advantage of U.S. Savings Bonds? - [x] They are backed by the full faith and credit of the U.S. government. - [ ] They offer the highest returns compared to all other investments. - [ ] They can be cashed at any time without penalties. - [ ] They are exempt from all taxes. > **Explanation:** U.S. Savings Bonds are considered safe because they are backed by the full faith and credit of the U.S. government, ensuring repayment. ### Which factor distinguishes Series I Savings Bonds from Series EE Bonds? - [ ] Series I bonds are purchased at half of the face value. - [x] Series I bonds have an inflation adjustment component. - [ ] Series EE bonds can earn interest for up to 50 years. - [ ] Series EE bonds provide tax-free returns. > **Explanation:** Series I Savings Bonds include an inflation adjustment in their interest calculation, protecting against inflation. ### How long must you hold a U.S. Savings Bond before you can cash it without a penalty? - [ ] 6 months - [x] 5 years - [ ] 10 years - [ ] 20 years > **Explanation:** If cashed within the first five years, the last three months of interest are forfeited. Therefore, holding the bond for at least five years avoids penalties. ### Where can individuals purchase U.S. Savings Bonds now? - [x] TreasuryDirect website - [ ] Any local bank - [ ] Financial advisors - [ ] Post offices > **Explanation:** As of 2012, U.S. Savings Bonds can only be purchased electronically via the TreasuryDirect website. ### What is the primary purpose of U.S. Savings Bonds? - [ ] For short-term investment opportunities - [ ] For hedging against stock market declines - [x] For long-term savings with stable returns - [ ] For quick liquidation for emergencies > **Explanation:** U.S. Savings Bonds are especially designed for long-term savings with stable returns due to the secure nature offered by the backing of the U.S. government. ### Are U.S. Savings Bonds exempt from state and local taxes? - [x] Yes, they are exempt from state and local taxes. - [ ] No, they are subject to state and local taxes. - [ ] They are only exempt from state taxes. - [ ] They are only exempt from federal income taxes. > **Explanation:** Interest earned on U.S. Savings Bonds is subject to federal income tax, but state and local taxes do not apply. ### Why might an investor choose a Series EE bond over a Series I bond? - [ ] For higher short-term gains - [x] For guaranteed doubling of principal invest in 20 years - [ ] To protect against inflation exclusively - [ ] For a variable fixed rate > **Explanation:** Series EE bonds are guaranteed to double in value over 20 years, appealing to those looking for guaranteed stable returns. ### What happens to the interest rate of a Series I bond during high inflation? - [x] The interest rate adjusts higher. - [ ] The interest rate remains fixed. - [ ] The interest rate decreases. - [ ] The bond stops earning interest. > **Explanation:** Series I bonds have an inflation adjustment component, which increases the interest rate during high inflation periods. ### After what period will Series EE Bonds mature? - [ ] 10 years - [x] 20 years - [ ] 15 years - [ ] 5 years > **Explanation:** Series EE bonds are designed to mature in 20 years, at which point they are guaranteed to have at least doubled in value. ### What is a defining feature of U.S. Savings Bonds that makes them attractive during economic downturns? - [x] Their safety and government backing - [ ] Immediate liquidity without penalty - [ ] Exemption from all types of taxes - [ ] They outperform all equity investments > **Explanation:** U.S. Savings Bonds are very safe investments due to being backed by the U.S. government, making them attractive during economic downturns.

Thank you for exploring the details of U.S. Savings Bonds. Keep investing wisely and continue to expand your financial knowledge!